Tag Archives: Crude

Reuters: Crude update

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The ‘demand destruction’ still leaves a net increase in demand, just smaller than anticipated.

While the US is using a tad less gasoline, consumption elsewhere has picked up.

And this is with a weak world economy:

NYMEX-Oil steadies on OPEC output cut

by Rebekah Kebede

Meanwhile, the International Energy Agency lowered its 2008 world oil demand growth forecast by 100,000 barrels per day (bpd) to 690,000 bpd and also trimmed its forecast for 2009 global demand growth by 40,000 bpd to 890,000 bpd.[ID:nLA109634]

This is confirmed by Saudi production rising to 9.6 million bpd in last month’s report.

OPEC’s decision to stick to quotas gives the Saudis cover should demand for their output fall and be seen as a production cut by the rest of the world.

Oil prices had gained a dollar earlier Wednesday after OPEC ministers meeting in Vienna made the unexpected decision to cut output by around 500,000 barrels per day (bpd) from the market after high fuel prices and wider economic problems hit demand in the United States and other large consumer nations.

Any pickup in the US or Euro economies will probably increase demand for crude, and the Saudis don’t have more than maybe 1 million bpd spare capacity.

The ‘Master’s sell-off’ may have run its course, allowing the Saudis to work prices higher if they so desire.

Lower crude prices continue to support the USD.

*U.S. crude inventories down after Gustav

*OPEC makes unexpected output cut

*IEA cuts 2008, 2009 global demand forecasts

*Hurricane Ike likely to miss offshore oil, refineries

NEW YORK, Sept 10 (Reuters) – U.S. crude oil futures fell more than a dollar in volatile trading on Wednesday as a government report showed crude oil supplies building up in the nation’s primary Gulf Coast refining region after Hurricane Gustav crippled several plants last week.

The increase in crude inventories in the Gulf Coast region offset concerns over a larger-than-expected nationwide drawdown, dealers said.

NYMEX October WTI futures CLV8 CLc1 were down $1.53 at $101.73 a barrel, at 11:01 a.m. EDT (1501 GMT), trading between $101.36 and $104.97 a barrel.

“One reason that crude is selling off in the face of a seemingly supportive 5.9 million barrel (nationwide) crude draw is the fact that stocks actually built by 1.8 million barrels in the Gulf Coast region as crude supply was backed away from the downed refineries,” said Jim Ritterbusch, president, Ritterbusch & Associates, Galena, Illinois.

Weekly data from the U.S. Energy Information Administration showed refinery utilization plunged to 78.3 percent of total capacity in the week ending Sept. 5, the lowest level seen since October 2005 when hurricanes Katrina and Rita ravaged Gulf Coast refineries.


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Re: Crude oil pricing

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(an email exchange)

>   
>   On Thu, Aug 7, 2008 at 7:15 AM, Scott wrote:
>   
>   crude moves further in backwardation.
>   

Right, indicating futures buying subsiding and inventories not above desired levels for commerce.

>   
>   CL vs brent now 160 over vs 120 under 2 weeks ago!
>   

Also indicating any excess inventory is gone, thanks!

Might be near the end of the second Master’s sell off.


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Re: UK economy

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(an email exchange)

>   
>   
>   On Wed, Aug 6, 2008 at 12:25 AM, Prof. P. Arestis wrote:
>   
>   Dear Warren,
>   
>   Just received the piece below. The situation over here is getting
>   worse but pretty much as expected.
>   
>   Recession signalled by key indicators of British economy
>   
>   
>   Best wishes, Philip
>   

Dear Philip,

Yes, seems tight fiscal has finally taken its toll and is now reversing the ugly way – falling revenues and rising transfer payments.

Without support from government deficit spending, consumer debt increases sufficient to support modest growth are unsustainable.

And with a foreign monopolist setting crude oil prices ‘inflation’ will persist until there is a large enough supply response,

It’s the BoE’s choice which to respond to, though ironically changing interest rates is for the most part ceremonial.

All the best,
Warren


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Re: Resource allocation

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>   
>   On 8/3/08, Craig wrote:
>   
>   Ok. And the irony is as prices fall, demand increases again.
>   Until consuming governments get their head around that fact
>   and put some kind of floor under crude prices to incent
>   substitution (which may be beyond their thinking and/or impossible
>   politically), it seems like crude prices are gonna play rope-a-dope
>   with consumers.
>   
>   
>   Craig
>   
>   

Crude will be rationed as is everything else (scarcity, etc.).

The question is how. Ration by price or by other things?

Rationing by price is the most pervasive and means the wealthy (by definition) outbid the less wealthy for the available supply.

Make you wonder why the Democrats support higher prices, as that means they support their supporters going without while the wealthy drive any size SUV they want. Much like wondering why Obama supports Bernanke after Bernanke explained to Congress how he’s keeping inflation down by keeping a lid on inflation expectations after explaining the main component of inflation expectations is workers demanding higher wages, meaning Obama, Kennedy, and the rest of the left is praising Bernanke for doing a good job of suppressing wages.

Non-price rationing is less common but not unfamiliar, such as mandating cars get an average of 27 mpg, minimum efficiency standards for refrigerators, windows, etc. This takes an element of rationing by price away and results in the wealthy consuming less and leaving some for the less wealthy to consume a bit.

So seems to me the logical path for the Democrats would be something like my 30 mph speed limit for private transportation, which is ‘progressive’ and also drives the move towards public transportation with non price incentives as previously outlined. But there hasn’t even been any discussion of a progressive policy response. All seem highly regressive to me.

So I expect the world’s new and growing class of wealthy will continue to outbid our least wealthy for fuel and other resources.

Also, there may be limits to how high we want world consumption/burning of fuels for all the various ‘green’ reasons.

That would mean drilling and other production increases are out, as would be increased use of coal via the electric grid for electric cars.

And, again, it would be the world’s wealthy outbidding the less wealthy for consumption of the allowable annual fuel burn, as somehow allocation by price continues to rule.

Most paths keep coming down to the continuing combination of weakness and higher prices.

Warren

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(comments from my brother, Seth, who was cc’d)

>   
>   I think democrats have lots of business and profits waiting
>   in govt subsidies for wind and solar. If oil prices fall that goes
>   away for now and they can’t produce on the subsidies for
>   them-cynical view but probably true
>   
>   There are also a lot of wealthy democrats and they want their
>   votes. Poor people all vote for democrats anyway-even with
>   declining lifestyles they are not going to McCain. So I think
>   Obama is pandering to the wealthy-it might be who he is-no
>   one really knows.
>   
>   With all of their green talk I have not seen any of them reduce
>   air travel, suv caravans or turn off the a/c in the capital. Just a
>   way to get votes and sound concerned. I saw a tv program
>   about how the chinese olympic swimming building is a green
>   sustainable building. It is 7 acres, pools, 25,000 people.
>   they finally said it uses about 25% less energy than a comparable
>   building would have. That is not green or sustainable, especially
>   since the building was not needed in the first place. I think “green”
>   is about making money, not the environment.
>   
>   
>   Seth
>   

I just can’t allow myself to be that cynical like you new yorkers!

:)

Warren

>   
>   
>   I think I am cynical usually, but this green thing drives me nuts
>   it started 30 years ago but is now all about money
>   when I see some lights turned off in Times Square (even in the
>   daytime) or the 5 huge spot lights on the CBS building lighting up
>   Katie Couric’s 50′ x 30′ poster which are on 24 hours a day turned
>   off, then I will believe it is about resources and not money.
>   there is a long way to go.
>   they advertise expensive green buildings here-I am not kidding-the
>   big thing is thermostats with timers on them and bamboo floors-didn’t
>   we have those 30 years ago??
>   
>   they talked about the oscar ceremony being green this year-the
>   celebrities were all giddy about it-what they did was use red
>   carpet made of recycled fibers????? what is that?
>   absolutely nothing-
>   anyway, time to calm down. too much excitement here
>   seth –
>   
>   

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Reuters: House rejects selling 10% of SPR

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Just saw that the house just rejected this.

Looks like it was one more reason for technical weakness in crude, along with the vote to limit speculation and the oil storage company’s futures and cash market issues and bankruptcy.

White House threatens veto on bill to sell govt oil

by Tabassum Zakaria

(Reuters) The White House on Thursday threatened to veto legislation that would require the government to sell 10 percent of the oil in the nation’s emergency petroleum stockpile.

The House of Representatives was expected to vote on the bill later on Thursday. Democrats hope the legislation will lower oil prices by putting on the market more of the Strategic Petroleum Reserve’s light, sweet crude that is sought by refiners.

“Drawing down our emergency oil reserve in the absence of a severe energy disruption is counter to the purpose of the SPR, and offers the nation a quick fix instead of much needed long-term, responsible energy solutions,” the White House said in a statement.

The bill would require the government to sell 10 percent of the emergency stockpile’s oil, or 70 million barrels, in the open market. About 40 percent of the stockpile’s oil is light sweet crude.


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Re: Oil as a % of global GDP

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>   
>   On Sun, Jul 20, 2008 at 10:46 PM, Russell wrote:
>   
>   Brad Setser, at Follow the Money, presents a couple of graphs on changes in
>   oil export revenue: The Oil Shock of 2008.
>   
>   The following graph shows the Year-over-year change in oil exports as a
>   percent of world GDP (and in billions of dollars).
>   
>   

>   
>   Year-over-year change in oil exports
>   
>   This calculation assumes that the oil exporters will export about 45 million
>   barrels a day of oil.
>   
>   Each $5 increase in the average price of oil increases the oil exporters’
>   revenues by about $80 billion, so if oil ends up averaging $125 a barrel this year
>   rather than $120 a barrel, the increase in the oil exporters revenues would be
>   close to a trillion dollars.
>   
>   Assuming oil prices average $120 per barrel for 2008, the increase in 2008 will
>   be similar to the oil shocks of the ’70s.
>   
>   

Right, the notion that oil is a smaller % of GDP and therefore not as inflationary was flawed to begin with and now moot.

Two more thoughts for today:

First, the second Mike Masters sell-off may have run its course. The first was after his testimony in regard to passive commodity strategies which I agree probably serve no public purpose whatsoever. The second was last week as markets expect Congress to act to curb speculation this week, which they might. Crude isn’t a competitive market (Saudi’s are the swing producer) so prices won’t be altered apart from knee jerk reactions, but competitive markets such as gold can see lower relative prices if the major funds back off their passive commodity strategies.

Second, just saw a headline on Bloomberg that inflation is starting to hurt the value of some currencies.

Third, the Stern statement will continue to weigh on interest rate expectations up to the Aug 9 meeting.

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Crude sell off

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Seems like a sale ahead of possible Congressional action to limit ‘speculation’.

Not sure how big the dip might be, but yet another buying op as the choice remains – pay the Saudis their asking price or shut the lights off.

The price only goes down if the Saudis cut price, or if there is a supply response of more than 5 million bpd that dislodges them from being swing producer.


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Deflation forecast

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This is the deflation argument.
(See below)

Never seen a split quite like this with calls for both accelerating inflation and outright deflation.

Which will it be?

My guess is inflation for the US as our friendly external monopolist continues to squeeze us with ever higher crude prices.

The political process is ensuring they will be passed through as sufficient government ‘check writing’ (net government spending) is sustained to support real growth.

(Bear Stearns, housing agencies, fiscal rebates, fiscal housing package, etc.)

And the dollar continues to adjust to the sudden, politically induced shift in foreign desires to accumulate USD financial and domestic assets.

Various private Q2 GDP estimates are now up to 2% – more than sufficient to support demand and pass through the higher headline prices.

Government is never revenue constrained regarding spending and/or lending.

The limit to government check writing is the political tolerance for inflation, which grows with economic weakness.

This inflation looks to me to be far worse than the 1970s.

Back then, we were able to muster a 15 million bpd positive supply response in crude that broke OPEC by deregulating natural gas.

We don’t have that card to play this time around.

From HFE:

July 14, 2008

WORLDWIDE:

  • Global Disinflation Is Going To Be The Next Big Move For The Bond Markets – Weinberg
  • Commodity And Oil Prices Cannot Rise Forever… There Is No Inflation – Weinberg
  • Bonds To Benefit – Weinberg

UNITED STATES:

  • STOP PRESS: Treasury, Fed To Make Credit Available To GSEs; Treasury To Seek Authority To Buy Their Stocks – Shepherdson
  • This Is A Lifeboat, Not a Bailout; Aim Is To Prevent Uncontained Failure – Shepherdson

CANADA:

  • We Cannot Rule Out A Rate Cut Tomorrow – Weinberg

EURO ZONE:

  • Core CPI Shows No Medium-Term Inflation Risks – Weinberg
  • Production Data Will Be Really Soft – Weinberg

GERMANY:

  • Core CPI Still Under 2% And Steady, ZEW At New Record Low – Weinberg
  • … Tighter Money Is Unhelpful Here – Weinberg

UNITED KINGDOM:

  • Starting Point For August QIR Forecasts To Emerge In This Week’s
  • Reports: Most Inputs To The Forecasts Will Be Stronger – Weinberg

FRANCE:

  • Not-Too-Scary Inflation Report Exported: Core Prices Are Steady – Weinberg

JAPAN:

  • Three Soft Report This Week Will Keep Investors Moving Out Of Stocks, Into Bonds – Weinberg

AUSTRALIA:

  • CPI Report For Q2, Due Next Week, May Rekindle Inflation Worries – Weinberg

CHINA:

  • Exploding Foreign Borrowing Diminishes Foreign Currency Reserve Adequacy; Trends Suggest Further Decay – Weinberg
  • GDP Will Be Below Recent Trend In This Week’s Report – Weinberg


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The Independent: UK Bank deputy chief warning

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Bank deputy chief warns of market trouble to come

by Ben Russell, Political Correspondent and Sean O’Grady

Britain is facing the risk of renewed turmoil in the financial markets, the new deputy governor of the Bank of England warned yesterday.

Professor Charlie Bean, the deputy governor for monetary policy and a former chief economist at the Bank, raised the prospect of a slowing global economy triggering a new round of problems with corporate loans and said that the impact of the credit squeeze could be greater than Bank projections.

Yes, but unlike the Eurozone, the BoE is permitted to ‘write the check’ as in the treasury.

National solvency is not an issue in the UK as it is in the Eurozone when weakness is addressed.

He told members of the Commons Treasury Select Committee that Britain faced “major conflicting risks” threatening the Government’s inflation target from the problems of a slowing economy and rising commodity prices.

Yes, the twin themes of weakness and inflation.

In a memorandum to the committee, Professor Bean warned that the “dislocation” in the financial markets “probably has further to run, especially if a slowing economy here and abroad generates a second round of write-downs, this time associated with corporate loans. Moreover, the impact of the tightening in the terms of availability of credit could prove greater than is embodied in the central case in our most recent set of projections”.

Agreed. And while ‘writing the check’ can readily address these issues with no risk to government solvency, it will also support the higher prices he next discusses:

He said that increasing oil and other commodity price rises would lead to higher inflation becoming “embedded in the economy”, warning that people might seek to offset price increases by making higher wage demands. He said: “There is no doubt that the UK economy presently faces the most challenging set of circumstances since at least the early 1990s and probably earlier.”

Professor Bean said oil prices could continue to rise for another two years and cautioned that Britain faced the danger of a pay-price spiral if workers tried to compensate by pushing up wages. He said: “It certainly poses a significant challenge. There is no doubt about that at all. It may be a relatively unlikely event but it could be particularly unfortunate if it happened, if households and businesses start losing faith in the idea that inflation will stay low, round about the target, they start building it into their pay and prices and inflation becomes much more embedded into the system… Provided pay growth remains subdued, the current pick-up in inflation will be temporary.”

Living standards, the deputy governor stressed, will inevitably be lower because of the global inflation in commodity prices.

Agreed. It’s all about real terms of trade, which have also been declining rapidly in the US as evidenced by the drop in growth of GDP and the drop in non-oil trade deficit.

My guess is the most likely political response in the US and the UK is proactive deficit spending from the treasury to address the weakness and higher interest rates to address the inflation.

Unfortunately the deficit spending that supports domestic demand will also support crude consumption (as well as housing) and ‘monetize’ the ever higher crude prices being set by the Saudis, thereby supporting ‘inflation’ in general.

And this will trigger ever higher interest rates from the Central Bank as inflation trends even higher.

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